MENU

8 Differences Between Investing in REITs and Physical Properties

In my earlier article, I shared four key differences between investing in real estate investment trusts (REITs) and physical properties. It encourages you to reflect on your financial status, loan eligibility, and investment objectives. Hopefully, you have a better idea on which of the two you should start investing first.

However, if you are still undecided on whether to invest in REITs and physical properties I will share four more differences between investing in the two here. This will make a total of 8 differences.

From this, I hope you can make a wiser decision for your investment portfolio.

Quality of Tenants

If you invest in REITs, you will derive income from a pool of commercial tenants. These tenants vary according to the type of REITs you choose.

For instance, if you buy a retail REIT, you would expect to receive income from retailers. If you buy hospitality-based REITs, you would expect income from the operations of hotels.

When you buy REITs, the quality of tenants is usually far more superior than one individual who intends to occupy your apartment. This is because they typically have stronger financial positions, a brand and a reputation to protect. Thus, there is lesser risk of rental default from commercial tenants as compared to tenants we get from renting out properties.

Lease Periods

Lease tenure varies according to the type of properties. For instance, it is common for retail leases to be around three years. Meanwhile, leases to the hotel and hospital operators have a duration of 10 – 20 years.

If you intend to rent out a small apartment, the tenancy agreement is usually for a shorter period. The duration may vary between six, 12 or 24 months, subject to the common practices of the rental market in a country. The continuity of your rental income depends on your ability to attract, retain and collect money from your respective tenant for as long as you possibly can.

Would you like to receive uninterrupted income consistently from making a one-time investment in a REIT over the next five, 10 or 20 years, or worry about fluctuations in your rental income?

Management

I believe there are two main objectives of property management. Firstly, it is about collecting money from tenants as much and as efficiently as possible. Secondly, it is about enhancing the value of the property over the long-term. It involves continuous maintenance of properties – from minor repairs to major renovations and refurbishments.

If you invest in a small apartment, then, it may certainly be helpful to have a reliable handyman or a contractor to assist you in this area if you wish to delegate. If you invest in REITs, you are relying on the professional expertise of the appointed property managers to carry out a good job to manage the properties within the portfolio.

Tax Issues

If you invest in REITs, you will receive distributions as a form of passive income and enjoy capital gains if their prices appreciate. It is similar to investing in physical properties where you receive rental income and enjoy long-term capital appreciation.

The difference lies in their tax treatment. Once again, their treatment would differ according to your country of residence.

For instance, you may not need to pay income tax on distributions received from REITs. However, you would most likely pay income tax on rental income from your small apartment. Hence, it is wise to consider tax issues before you venture into any investment.

The Foolish Takeaway

Should you go for a small apartment or build a REIT portfolio? Once again, it depends on your personality, financial standing, and investment motives. It is prudent to explore and evaluate the pros and cons of each investment vehicle before investing to make prudent investment decisions.

We believe we’ve identified a dividend dynamo whose financials are strong enough to qualify its dividend as “safe” – and have profiled this stock in a research report that’s now available to download completely free of charge. Simply click here to claim your copy today!

If you want to learn more about investing and to keep up to date on the latest financial and stock market news, you can sign up for a FREE subscription to The Motley Fool's investing newsletter, Take Stock Singapore

Also, like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.